Investor protection bill interferes with better efforts

By Alicia H. Munnell

Members of Congress who say they want to help households with low and moderate incomes save for retirement have been rallying behind the Retail Investor Protection Act, a bill introduced recently that aims to ensure the availability of financial products and advice at a low cost. But the bill is fundamentally misconceived: If passed, it will get in the way of efforts already underway by federal regulators who can accomplish the same goals more efficiently.

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Both the U.S. Department of Labor (DOL) and the Securities and Exchange Commission are considering changes that would affect the conduct of broker-dealers serving retail clients. The motivation for the DOL changes is to reduce the likelihood that third-party incentive payments could encourage broker-dealers to sell high-fee mutual funds that will substantially reduce ultimate asset accumulations for customers with individual retirement accounts. The SEC has the broader concern that investors do not recognize the differences in standards to which investment professionals are held; it wants to level the playing field.

The two agencies, which administer different statutes, necessarily take different approaches. The SEC is considering extending fiduciary conduct standards to broker-dealers who provide investment advice to both retirement and non-retirement accounts. The SEC change would mean that broker-dealers must act “in the best interest” of their customers, as opposed to the current standard of “suitability.” The new standard would be somewhat higher. The SEC might also require broker-dealers to disclose whether they have a potential conflict of interest – for example, whether they will receive a commission from the provider for selling a particular product.

The DOL approach, by broadening activities that would be considered the provision of advice, would extend different fiduciary obligations to anyone who gives advice to IRAs (banks, insurance companies, registered investment advisers and broker-dealers). The DOL proposal would not require a change in the standard of conduct toward clients, which makes it different from the SEC proposal. Rather, it would make more broker-dealers “fiduciaries” under the Internal Revenue Code (IRC) and thus subject to IRS prohibited transaction rules. Importantly, under the self-dealing provision, it would eliminate third-party fees, such as 12b-1 and other revenue-sharing fees. The 12b-1 fees are paid by mutual fund providers to broker-dealers for marketing, distribution, and servicing expenses. They continue as long as the customer holds the shares, and provide a clear incentive for broker-dealers to sell high-fee products.

The need for action from both agencies is real. As a result of rollovers of pension money, IRAs have become the biggest form of retirement savings – bigger than 401(k)s. But IRAs have fewer regulatory protections than 401(k)s and defined benefit plans, which are regulated under the Employee Retirement Income Security Act of 1974. One consequence is that IRAs tend to be invested in mutual funds with higher fees. And fees have a significant effect on how much money people have at retirement.

Despite the fact that the two agencies are considering very different changes, the Retail Investor Protection Act (H.R. 2374) would require the DOL to delay rule-making until after the SEC takes action. It would also require the SEC to undertake new analysis and cost benefit studies, even though the agency has already worked on the issue for several years. Such requirements are costly and unnecessary. The proposals likely to emerge from the two agencies are quite different and should not create any conflict. Although The Retail Investor Protection Act might sound logical, it is not. The legislation is misconceived and should be opposed.

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About Encore

Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.